Taxing Mineral Wealth Misses Its True Value To a Country

The greatest benefit mining affords national economies is not government revenue, but its contribution to foreign direct investment, the International Council on Mining and Metals has said.

This is supported by several studies showing 60%-90% of foreign direct investment received by low-and middle-income economies flows from mining.

Yet governments, desperately seeking more revenue to finance their debts and meet their countries’ developmental needs, ignore this and continue to introduce legislation aimed at increasing revenue rather than attracting foreign direct investments.

Studies by the council and consultancy Oxford Policy Management show 30%-60% of total exports in these low-to medium-income economies flow from mineral exports.

Although that is a large percentage of a relatively small total, mining exports generate much-needed foreign currency.Only between 3% and 20% of government revenue comes from mineral taxation, and employment remains relatively small in relation to the total national labour force.

Australia is a fine example of politicians’ decision to tax mining, scaring foreign direct investors, with a reversal of the decision with the change of government creating uncertainty.The former Labor government introduced the mining rent resource tax, which ranged between 30% and 40% depending on a company’s profit.

Such tax policies are intended to raise a country’s tax revenue when companies make windfall profits during times of high commodity prices.Newly elected conservative Prime Minister Tony Abbott, however, announced that the tax would be abolished on coal and iron ore, but would be retained on petroleum.

Media reports from Australia said that in the first six months after its inception, the tax had raised only $126m, against a forecast for the full year of $2bn. SA introduced mining royalties in 2010 and the contribution has been about R5bn a year.

In SA, the focus has shifted from nationalisation to getting the government’s "equitable share of mineral resource rents through the tax system", with Finance Minister Pravin Gordhan announcing a broad review of SA’s tax system. Judge Dennis Davis will lead the inquiry, which will include whether the government’s approach taken with the mineral and petroleum royalty regime is sufficiently robust.

The Treasury and Mr Gordhan believe the royalty regime has "broadened the tax base and allowed for increased revenue during periods of high commodity prices, while providing relief to marginal mines when commodity prices and profitability are low".

The Davis committee will have to assess what the most appropriate mining tax is to ensure South Africa remains competitive as an investment destination. Deloitte associate director Alex Gwala says the decisions by the Australian government on the mining rent resource tax, as well as the decision to dismantle the carbon price mechanism, are sure to affect SA’s approach. The rent resources tax proposed at the African National Congress conference last year is similar to the Australian mining rent resource tax.

He says the review committee offers an opportunity to get involved in the discussions outside of politics. "It is our duty to drive the discussions without focusing on politics."

Mr Gwala says the mining industry is affected by several factors that all have an effect on the profits. This includes government intervention in the granting of mining and water licences, community demands, labour demands, and demands on the profits of the company in the form of additional taxes beyond corporate tax.

"We cannot only focus on tax, as one has to look at the whole chain of influences. From what I hear, Judge Davis is taking that route," Mr Gwala says. "If the committee is only going to look at tax, it will not achieve much."

He says given that the committee’s finding will still be a while coming, the uncertainty facing the mining industry can be expected to continue beyond Wednesday’s medium-term budget policy statement and even next year’s February budget.

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